The termination of an option to purchase is not a transfer that could be set aside as a fraudulent transfer, according to a per curiam opinion from the Third Circuit. Thomas L. Ambro was among the three circuit judges that issued the nonprecedential opinion on December 15.
The debtor confirmed a chapter 11 plan that transferred real property to a secured creditor. The plan gave the debtor an option to repurchase the property. The plan contained details on when and how the debtor could exercise the repurchase option.
Five years later, the secured creditor sent notices, required by the plan, telling the debtor that the repurchase option had to be exercised within 30 days. The debtor did not respond.
Six months later, the debtor filed another chapter 11 petition, listing the property and the purchase option as assets. The secured creditor filed a complaint seeking a declaration that the property was not part of the new chapter 11 estate. The debtor counterclaimed, contending that the termination of the repurchase option could be avoided as a fraudulent transfer under Section 548.
Bankruptcy Judge John K. Sherwood of Newark, N.J., ruled that the repurchase option had terminated before bankruptcy and that there was no transfer to set aside. The district court affirmed, but the debtor appealed to the circuit.
De novo, the circuit reviewed the question of whether the termination of the option was a transfer.
“Leaving aside the issue of fraud,” the circuit panel said that “the District Court correctly found the option to repurchase the Property to be a future contingent interest protected under the Bankruptcy Code.”
However, the panel said, the “Debtors’ failure to convert this contingent interest into actual ownership did not amount to ‘dispos[ing] of or part[ing] with’ their protected interest in the Property. See § 548(a)(1)(B).”
Quite simply, the panel said, the “Debtors did not transfer their option rights to [the secured creditor] but rather ‘failed to pursue a business opportunity’ by allowing their interest in potential ownership to lapse.” Therefore, “any interest in the Property no longer existed when they filed for bankruptcy.”
The panel held that “the option did not constitute a ‘transfer’ under the Bankruptcy Code’s § 548(a)(1)(B)” because the “Debtors did not possess the option they failed to pursue.”
The termination of an option to purchase is not a transfer that could be set aside as a fraudulent transfer, according to a per curiam opinion from the Third Circuit. Thomas L. Ambro was among the three circuit judges that issued the nonprecedential opinion on December 15.
The debtor confirmed a chapter 11 plan that transferred real property to a secured creditor. The plan gave the debtor an option to repurchase the property. The plan contained details on when and how the debtor could exercise the repurchase option.
Five years later, the secured creditor sent notices, required by the plan, telling the debtor that the repurchase option had to be exercised within 30 days. The debtor did not respond.
Six months later, the debtor filed another chapter 11 petition, listing the property and the purchase option as assets. The secured creditor filed a complaint seeking a declaration that the property was not part of the new chapter 11 estate. The debtor counterclaimed, contending that the termination of the repurchase option could be avoided as a fraudulent transfer under Section 548.